Why capping diesel subsidy is big reform

Raghuram Rajan, chief economic advisor to the finance ministry, has hinted at a freeze on diesel subsidy to trim the fiscal deficit. This is welcome. Diesel prices have been freed on paper, but oil marketing companies have been allowed to raise prices only in homoeopathic doses.

That's a suboptimal solution. Open-ended oil subsidies should end as the government needs to borrow more to fund them, and this pushes up the fiscal deficit — the difference between total government expendi ture and total non-borrowed receipts. A high fiscal deficit fuels inflation, raises the trade deficit, causes a slide in the rupee and makes crude imports costlier. Rajan has suggested a cap on subsidy at the current levels until it reaches the level of global prices.

The idea is to insulate the government's balance sheet from global price risks. This makes sense. It will bring down our oil import bill and lower the current account deficit. But the government should also provide a clear timeline for complete decontrol of diesel.

It must open marketing to indepen dent players. Greater competition among these companies would strip off artificial layers of cost, and also lower diesel prices. The principle should extend to fertiliser subsidy as well, via nutrient-linked subsidy. Decontrol of urea prices will end distortions in fertiliser use and raise farm productivity, encourage companies to augment capacity, reduce dependence on imports and lower the subsidy bill.

Fertiliser companies must be paid their dues on time. Eventually, the government should directly pay subsidy to farmers through Aadhaarlinked bank accounts, instead of reimbursing the money to companies. A merger of the fertiliser ministry with the farm ministry will improve farmers' earnings. That's an idea whose time has come.